ABB India Ltd (ABB) Q4 FY23 Earnings Concall Transcript

ABB India Ltd (NSE:ABB) Q4 FY23 Earnings Concall dated May. 05, 2023.

Corporate Participants:

T. K. Sridhar — Chief Financial Officer

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Kiran Dutt — President, Electrification Business

Analysts:

Renu Baid — IIFL Securities — Analyst

Puneet Gulati — HSBC — Analyst

Parikshit Kandpal — HDFC Securities — Analyst

Deepak Krishnan — Macquarie — Analyst

Jonas Bhutta — Birla Mutual Fund — Analyst

Mahesh Bendre — LIC Mutual Fund — Analyst

Aditya Mongia — Kotak Securities — Analyst

Priyankar Biswas — Nomura — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to ABB India Limited Q1 CY2023 Earnings Conference Call. [Operator Instructions].

I now hand the conference over to Mr. T.K. Sridhar, Chief Financial Officer of ABB India Limited. Thank you, and over to you, sir.

T. K. Sridhar — Chief Financial Officer

Thank you. Thank you very much. A very good morning to all of you. So welcome to the Q1 2023 results call, analyst call.

So along with me, I have Mr. Sanjeev Sharma, the Country Managing Director; and then I have Mr. Sanjeev Arora, representing Motion business, Kiran from Electrification. Unfortunately, we don’t have anyone from Process Automation because they are busy with the customers and Subrata, who heads the Robotics will join us after some time.

So with this, I hand over to Sanjeev to take us through the Q1 performance. Over to you, Sanjeev.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you, Sridhar. Good morning to all of you. Thanks for joining in this call, for our first quarter or in Indian terms the last quarter, let’s call it as a January-March quarter.

Business highlights, just to give you certain pointers towards what we saw in the last quarter. In results, we had a strong start of the year. Our orders are up 36%. Revenues are up 22%. This is something which we acknowledge as the highest ever order growth in quarter 1 in last five years. Our improvement on EBITDA margin is to 11.4%, which is 290 basis points year-on-year basis. PBT before exception is up 66% year-on-year and PAT is up 65% on like-to-like basis.

We continue to maintain and expand our cash position, which stands close to INR4,000 crores. We had the AGM yesterday, wherein all the shareholders who were present and also who joined online, they appreciated the first integrated report for 2022 published by us. It really has brought a lot of new elements, which makes it very easy to read for our shareholders.

Apart from financial, there are a lot of other qualitative aspects which have been added. And we believe this is a journey which will continue. And every year, when you have our integrated report, you will see the elements become even better. We will highly encourage, if you have not done it already, that please look at this first integrated report published by us, and we’ll be very happy to get your feedback as well in terms of what you like and also what we can improve on it.

On sustainability goals, our green power utilization is 100%, and it has progressed well for us as part of our RE100 goals. CO2 emissions were down across locations. And just to give you as a data point, in 2022, our GHG emissions were down 82%, and that’s the journey we continue to do. We have a very structured program and every month and every quarter and every year, we continue to make good progress in that direction. And we, of course, continue to have good discipline on waste and water management.

Next. Now in terms of market momentum, how we see it, on the right, you can see how the orders and revenue development has taken place. We continue to see strong growth across most business areas in short-cycle business, and that shows the width [Technical Issues]

Operator

Ladies and gentlemen, please stay connected. We’ve lost the–

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

— business across Tier 1, Tier 2, Tier 3 and even Tier 4 cities. I think that’s something which is really is the gain, and that’s where it contributes to the short cycle business because there’s an overall growth in different market segments. Our services for our installed base were up 37% on the orders and revenues were up by 33%. That shows that customers are investing in improving reliability, availability, maintainability and serviceability of their assets.

And on the continued momentum we see in the automotive and electronics side because these are the sectors which are expanding. Automotive on their own and plus the EV segment in automotive is contributing even faster growth. And also the value chain, whether it’s in the batteries or many others, we see a lot of absorption of ABB technology there. And electronics as one segment, I think, is going to expand in an exponential basis as we go forward. And a lot of our products and technology find their way there.

On the process side, power handling, motors and drive packages for metal, cement, oil and gas majors, I think that has been quite robust. And that shows that the demand and the distribution of all these output, be it metal, cement, oil and gas or the city gas distribution for the citizens of the different, different cities across, that expansion contributes directly to our order as well as revenue pipeline.

On the transport side, it’s I think, known to all of us, railways and metro, they are spending a lot, expanding a lot, modernizing a lot and our technology sits right at the heart of it. So that’s where, again, we get a benefit.

So with this, the order backlog has grown 37% to INR7,170 crores, which gives us good revenue visibility. And also, we have a good gross margin visibility there. And if we execute it right, we see future as a positive development on the revenue side as well the profitability side.

Some of the examples, just to give you a few examples in terms of which are the areas we touch with our technology, like for example, our system drives for the metals application, gas applications. We have robotics, earlier used to be only in the automotive sector, but now it really has gone deep and wide in the manufacturing sector, be it electronics, it is spun-dyed, specialty fiber, paint conglomerate or even the FMCGs, they are using our technology.

We have the metal majors who are buying a lot of power equipment from us. Traction technology for Bhopal and Indore metros and Indian railways. And of course the data center, which was a new segment, which we nurtured few years ago, it is really paying good dividends to us in terms of all large hyperscale data centers. Our position there is pretty strong. And we continue to support our customers to expand the data center in the digital economy today.

Robotic solution for EV cars, I think that’s a good expanding area. I mentioned gas distribution solution for seven Northeast states. And of course, the other four technologies like SCADA automation, which provides more reliability for Jetty pipeline. So if you really look into the — how our exposure to multiple market segments, we have 18 business lines, and they are exposed to about 22, 23 market segments, which are relevant for us. We track them. And there are the segments which are growing the fastest are in the focus category.

The ones which we started a few years and now they are creating a good base of business for us is in the enhanced criteria. And traditionally, we have been very strong in these so-called sustained market segments wherein our product offering and our installed base is pretty strong. So we continue to keep focus on them. A mix of high-growth segments and also the segments which are traditionally strong for us gives us good mix of growth on the both orders revenue and also give more diversity as different cycles of different market segments will play out in future.

Now when it comes to a theme of the quarter, which is electronics, if you look into the deep dive, Indian electronics market is expected to grow at a CAGR of 30% to reach $300 billion by FY26. So this is one area wherein we are quite positive in terms of supporting all the new capacities, which are coming in, which could be at a very high end, cell phones to industrial electronics, consumer electronics, electronic components, auto electronics, and government’s focus to really create more kind of independence from the global resources and have these capacities built inside the country. I think this theme seems to be having a good upturn for years to come, and we are happy to participate.

The other benefit we will get is when such capacities and the sub-assembly capacities gets developed. We will also have a lot of supply chain base that will get created in the country, which will also help us reduce our imports because some of the electronics is not manufactured in the country like power electronics and many other aspects of it. If that gets localized, that also helps us to increase our localization, which we wish to do in certain product categories.

On the ESG side, as I mentioned before, at energy level, our green power utilization is 100% compared to 2021 baseline. Waste recyclability stands at 97% compared to ’21 baseline. And also water recyclability we have reached at 50%. And we continue to focus in these areas. And every year, every quarter when you hear from us, you will see these numbers ticking in the right direction.

Our CSR focus continues to be in the high-impact areas, which is in education, diversity and inclusion, communities and environment. Here, we do have very impactful, very well-driven programs, be it in the education wherein we are covering 98 government schools around our plant, or educating youth on the IT skills. We are right now 200 women who are pursuing STEM courses. They come from the relatively underprivileged background. So we are giving them the active kind of scholarship. But at the same time we are giving them quite a bit of support in their internship, mentoring, so that when they come out of their colleges they are really ready for the market.

And same way in the communities and environment, we are helping a lot of infrastructure, public infrastructure upgrade, where we think it is easier for the women to come to the industrial areas. There are proper pathways. There are proper roads, and there are proper connectivity between the public transport and the plants they had to walk to, and they’re properly lighted so that everybody feels confident coming to the industrial plants. Because that’s one thing in order to increase the diversity, more women needs to come, not only to offices, but also to the manufacturing plants, and we need to create it.

And we also create them as a sample base for other industries to follow around their plants, to improve the infrastructure continuously.

With this, I now hand it over to T.K. Sridhar, our CFO, to talk about financial highlights.

T. K. Sridhar — Chief Financial Officer

Thank you, Sanjeev. So let’s go to the executive summary. I think the numbers speak for themselves. The first time, I could say that probably that we did definitely have a fantastic quarter.

So let’s look at how did we perform first versus the last Q1 and also then sequentially, how did we perform. I think the Q1 orders grew by 36%. We had revenues growing up by 22%. Backlog at an all-time high of 37% growth, and profit before tax was 66% higher and also the profit after tax like-to-like — on a like-to-like was 65%.

So I think overall, it was another positive quarter, and it was growth across all business lines, like what it was in the previous year as well. And we now, we see a solid backlog to secure our future revenues and not to stop with that. We also definitely see the opportunity pipeline, which is robust. And just to compare with how did we perform sequentially with Q4 ’22, I think we maintained the momentum by and large, definitely better in orders and also better in revenues as well but not in profitability.

The reason is in Q4 ’22, we had a favorable ForEx impact, which really helped us. And that was something which was there. And but also we did take up a provision of INR23 crores in this particular quarter for a traction motor issue, which we had and it’s more definitely and more tactical step to make this type of provisions to make sure that we have connections with the customers and the contract obligation’s properly met.

So I think — so with this, and we definitely ended with a strong cash balance of INR3,942 crores is what you see. So as we had said in the past, we have already earmarked certain cash of this for the expansions of our existing plants, what we have, including the modernization of it. Plus also and actively looking for the M&A options, what we had already mentioned in the previous calls. So overall, I thought this was a good, strong start for the year.

So that’s how we see it. All the businesses are at this point of time looking forward to engage with the customers to have the growth momentum.

Next slide. So just to dive a bit more deeper as to what actually made up for the changes, what we are seeing at this point of time in the businesses. And I think the first thing is that our material costs are holding pretty strongly at this point of time at between a band of 63.5% to 64.5% is what we see. So this is good. I mean, I would say with the commodity prices softening at this point of time, and we are able to hold on to the price in the market, is something which is definitely an item to watch out for going forward. So we will make sure that we are there continuously monitoring this particular item.

So next is around other income. I think other income definitely has — and [indecipherable] fixed there because we have a cash of INR3,900 crores that earns interest. So that’s something which is really interesting for us to have there to fuel our future growth opportunities as well. So those income is to an extent, supporting the bottom line as well.

Personnel expenses compared to Q-on-Q, which is the last — in the previous year, the same quarter and this quarter, we did have a slight increase. And that’s majorly because we had to pay the salaries of the people and also the incentives were announced in Q1 based on the performance what they have done for Q2. So there are no other special event for that. That’s something which is there.

Exchange commodity and variation impact was high. We had a favorable impact in Q4 2022. But on a like-to-like basis, we did not have much of an impact other than a INR9 crore positive impact, which we lost. Otherwise the other topics are pretty much similar. So we don’t have any other issues. And with respect to the other expenses, you will see that INR402 crores or the INR713 crores is something which would be interesting for you to know more as to why it is.

And I think I could tell you the majority of it has been on account of volumes, which we have grown. So that’s basically leading to that, be it freight, be it other expenses. Of course, we did have a bit of more travel expenses to do. That’s showing up as a positive impact in orders and the revenue execution. So that’s good. And also with the service revenues increasing naturally, some of these volume-related expenses were definitely — is expected to slightly go up. So but on a sequential quarter, we are more or less in the same line as what we were in previous, in the quarter.

Over to your next slide. So now we give a bit of color by division, by — I mean business segment by segment. So start with electrification. So electrification is definitely very strong at this point of time. Order growth of 44%. Revenue growth of 16%, and order backlog of 37%. So I mean, this is something that’s very nice to have. So they have backlogs.

And this is happening in all the divisions, be it smart buildings, distribution solutions as well as smart power. So it is across, well spread out. So that means we could definitely see that it is increasing.

So now coming to profitability. I think it has higher contribution from volume growth, which definitely helps the businesses absorb the cost and deliver better profitability. And price realization was definitely better in this quarter as well. And the capacity utilization in terms of automating the plants and making sure that they are more productive is actually one of the principles, which has started to pay out. I think we have heard several times in the past when Sanjeev was mentioning is how modernization is just not meaning better factories, it also means better production processes, which could do precise manufacturing and high quality stuff, which goes out of the factory. So that’s now in the terms of giving the benefits back to the organization that the impact what you see.

The next slide. So I think the related question, because it could be that is this margin in electrification sustainable, right? So that could be one of the interesting questions to answer. And I think that I would like to say that we have a backlog which has consistent margin earning capacity, right? But definitely, it depends on the mix which we and which industries we cater within the next few quarters depending upon the backlog which we have and the book-to-bill situation.

So because if you look at electrification, so they have definitely a high book-to-bill content. They definitely depend upon channel partners and distributors to give them the majority of the businesses. So at this point of time, I think on a blended basis, on a four quarterly basis is what we would try to maintain. That’s what we would like to say.

On the motion side of it again, is again another business segment, which is pretty much well holding up and it’s a very mature business where we see that the order growth was 37%. Revenue orders is something which is 36%, in line with the order growth, which is happening. And order backlog quite extensively with 19%. I mean there are no slow moving orders. They are pretty much very well solid orders, which are earmarked for execution in the coming quarters.

So the next coming to the PBIT story, they are definitely tracking well. And Q4 2022 was definitely a very strong quarter for them with the mix, which helped them to get that particular good margin and the capacity volumes which drove the volumes at that point of time. So if you look at it, it’s clear. I think Q2 and Q3 were something which were less in terms of the volumes.

There is a strong recovery in Q4 2022, and that’s probably compensated for the low recoveries in Q2 and Q3. And then again Q4 — the Q1 ’23, I think that’s basically where they could have performed definitely better. But we took a charge of INR23 crores, which we have published in SEBI as well as a onetime warranty cost for in traction motors, which we supplied. And that’s more because of the supplier quality, which we detected when we did. So I think that in the past.

Whenever we detect an issue which are going to have an implication with the customer, but there is a phenomena, there is a root cause analysis which is done and measured in terms of what it would need to try that particular position, and we take that position upfront and then make sure that we monitor and address the solution in the right manner. And at some point of time, with the mitigation plans, which will be there on those particular provisions what we have done, it’s not necessarily that entire amount may be spent.

But we need to allow time for this issue to be resolved, right, because they’re all on moving applications and trend. So I think it will take some time. We would measure that over the next three to four quarters to come.

The next slide, process automation, I think process automation had a very good Q2, Q3 and Q4 quarters, as we would see. These are all project orders. Project orders normally have a cycle in which they start to decide. So therefore, I think we do have a strong pipeline, which we see that will mature into orders in the next quarters to come. So therefore, I think we are pretty much stable on the orders what we see at this point of time. And also a bit of a time play out happens in project orders.

The last quarter is definitely weak because it’s the financial year of some of the companies. So they would have exhausted their budgets. And they definitely see new budgets coming in the next year, which starts from April month onwards. So let’s see how the decision plays out in the coming quarters.

Revenues, I think built on the backlogs which they had done, which they have in their pipeline. So they did 23% growth on revenues. So that has been a good part of it. But I think most of it came from system revenues. So that’s something which is dependent on the project execution lifecycle. So that’s how we see the mix a bit changed in this particular period. And that is probably also the reason why we had a dip in the margin. That’s what you see. But I think on a blended basis, 11% to 12% or 10% to 11% is something what we expect.

Robotics, again, this is also another business which we saw on quite a few — quite a strong uptick in orders. And that’s more market driven in terms of adopting robotics technologies in the production process of various markets segments, 23 market segments is what we track. So the revenue growth was slightly lesser because it’s more dependent on the offtake and assembly of the robots and supply. So I think we want to make sure that this will also be executed in the coming quarters to look at it. And margins definitely were superior supported by service and revenues from electronics segment is what we see.

So I think this is something is a fact sheet. I would say that we still remain at 13% of services, 6% in terms of project, and 80% is coming from products. So predominantly, our revenues are more predictable now with the backlog, what we have. And yes, I think the export markets are slightly muted, not because as a percentage, but as a value, we have definitely grown in terms of quarter-to-quarter as a growth percentage. But the local demand is definitely stronger than the export demand. And that’s probably playing out in percentage.

Next slide. Yes, so what’s going to be the focus areas of ’23? Of course, I think it’s penetration to the market, aligning with the industry things, that’s going to be the next problem that we — continued focus area is what we see.

Order backlog conversion. So we did have — we do have a strong order backlog at this point of time. So planned execution is the key. And the expectation is to maintain the margin momentum as what we said. We want to make sure that we hold on to the flat percentage of 10-plus as what we see at this point of time for the next few quarters to come. So to that we have credible performance on the go.

Our expansion plans for factories will definitely be aligned with the purpose with which we are making those investments. And sustainability is a part of our DNA as what we see. So with that, I probably — we can probably open up for Q&A.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Reno Baid from IIFL Securities. Please go ahead.

Renu Baid — IIFL Securities — Analyst

Yeah, hi. Good morning, team and congratulations for stellar performance for the quarter. The first question here is probably if you look at order flow trajectory across all segments, ex of PA, has seen a very strong growth. So is it something to also do apart from the broad optimism in the end market, some slippages of orders coming in from the previous quarter to this quarter, which has helped to accelerate the momentum?

And given the fact you’ve mentioned that pipeline for the rest of the year is healthy, should we expect that high double-digit, 20% to 30% growth in order inflow could be seen for the year as a whole, based on the pipeline that you have suggested?

T. K. Sridhar — Chief Financial Officer

Yes, so Reno, so let me answer that, and Sanjeev will definitely add his expert comments later. First of all, if we go to the — I would go on the two things. One, in which market segment we are in. So we are in those three sectors that if you look back to the slide of where Sanjeev was mentioning about fast growth, moderate growth and of course, the other one where we are. So our major play happens in the moderate growth sectors, with cement, tea and everything else. And we are definitely making it up with a lot of fast growth segments what we are focusing on.

So I think, at the end of the day, I think we expect a growth in the orders on a four quarter basis, which is a yearly running basis of 12% to 15% should be definitely a place to go. So these 20% or 30% is what we see, is something which depends on how the customer wants to make his order or decision [Phonetic] pattern, right?

So that’s something which is a mix of projects, which is a mix of also certain decisions, what will happen with respect to funding. So that’s what we see. But definitely, I think we are looking at a positive trajectory on that. Sanjeev, you want to add anything?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Yes. Thank you. Thank you, Sridhar. Thanks, Reno. From the overall construct of the market, I think just to add some granularity how we see the market and the development. So all the businesses that we have, out of 18 businesses who are exposed to service and who are exposed to the — say, the product business, I think there the growth is quite robust.

And that really represents what’s happening in the country across, because it is a secular growth not coming from very large industries, but it is coming across the cities, geographical distribution, across the market segment and also the category of the customers you have, not necessarily all the end users. You also have machine builders who may be supplying domestically as well as exporting and also a lot of participation in the infrastructure projects. So our channel partners, our integrators who are involved there.

So I would say on the product category side, it is quite strong. Then comes the next level wherein our product gets used into the subsystem. We call it as an ETO business, engineer to order. There again, it is the power distribution in the cities, renewables and also in the new segment and the industries, which are expanding or kind of increasing the capacities on an incremental basis on the ground side. So there, again, we see it’s pretty strong.

Now the third category is the system business, which is our projects business. It disconnected?

Renu Baid — IIFL Securities — Analyst

No, it’s audible.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

You are audible. So the project business, that’s where what we do is we are careful in terms of which kind of projects we take, which kind of segments we are focused on. So one is pure on the basis of where our value proposition is strong for the customer and wherein we add a lot of value for the customer. Because once you add a lot of value for the customer then it is possible to price that value. And when you price that value it also shows into your gross margin as well as in your books.

So that has been our focus. And project business typically tends to be more cyclic than the ETO and the products business. On the product business, I think most of the categories we have, it is pretty strong. One or two categories are seeing the headwinds, and they were growing quite strongly for last many quarters, but one or two categories have some headwinds. But other than that, I think it is a pretty robust market construct at this point of time in each area, including robotics, electrification and several categories of motion business.

Renu Baid — IIFL Securities — Analyst

Sure. Thanks. And my second question, or the last question here would be on profitability. Until back quarters back, we were confident of sustaining PBT margins of 10% plus. And now having seen margins improve sustainably across segments, we are indicating to maintain net margins of 10% plus. So this difference on the margin improvement, our trajectory or outlook over the last six months, is it primarily driven by the mix and the gross margin on account of softening of commodity prices or more to do with the overall improvement in the price realizations across and product and solutions for next year? So how should we look at from a two to three year perspective in terms of margin outlook?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

So margin gets affected by many variables. And one of the variable is the price realized from the market. And whether you have the capacity and capability to transfer in the inflationary environment, pass the cost increase to the customers. So I think we succeeded in both. And since our portfolio is positioned on to the high value-add as well as high quality, highly reliable products, I think there’s a lot of recognition in the market post-COVID to buy the products, which have the high reliability quotient.

And also not only reliability in the product quality, but also our ability to deliver them. So those two factors have allowed us to pass on inflationary cost to the market to a greater extent and also realization of the fair price given the demand supply situation we had in the marketplace to maintain the reliability of the product deliveries. So that’s one aspect.

The second aspect is that now if you talk about future, the future can be described out of the backlog because backlog is what you convert. And that backlog, the gross margin position, as it is visible today, if it is run over good capacity utilization, naturally, you realize a better profitability out of it, unless some kind of an uneven event, which is not foreseeable by us today comes in. And other than that, then the trajectory remains smooth. So if the — there’s a robust order pipeline, robust visibility of the revenues and the gross margins are to our satisfaction and we run the capacities to the levels we want to do.

So I think the trajectory is quite smooth, Reno, at this point of time when we look at it from the near future perspective.

Renu Baid — IIFL Securities — Analyst

Thanks, Sanjeev for the comments. All the best. Thank you.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you.

Operator

Thank you. We have our next question from the line of Puneet Gulati from HSBC. Please go ahead.

Puneet Gulati — HSBC — Analyst

Yeah, thank you so much, and congratulations on great numbers. Just continuing on the same thread, you talked about improved price realization. And so how should one think of it? Are you able to price your products better than what you used to in a pre-COVID environment? Or is this the mix which has changed?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

So two things have happened. One is the market has matured wherein the buyers have a much higher trust created among certain companies or certain brands who could support them during COVID period. I think that’s one something which is visible, which makes us easy to realize the orders in the marketplace. So that’s number one. If you talk about post-COVID period.

Puneet Gulati — HSBC — Analyst

Okay. Second part is the customer base which used to go — compare high-quality products with the cheap quality products to compare prices, I think that behavior has come down in the marketplace. They really try to compare apples with apples.

So we don’t see those kind of negotiation tactics in the marketplace because customers don’t want you to wait outside their room and negotiate. They actually are very professional. They connect with you online. They negotiate, and they have a reasonable expectation of price. And if we meet those criteria area, I think we get that benefit.

At the same time, we have been reducing our cost because of our localization and expanded volumes and our connect with the suppliers. That also contributes to our ability to kind of serve the market at a reasonable price. And at the same time, we are able to build our backlog. So these are the few factors that count. And then, of course, as I said, the customers are mature and they understand what’s happening on the inflation side. And also, there was a stress on the supply and demand side. So that also helps us realize the right price point in the marketplace. So these are the few factors we observed, Puneet.

Renu Baid — IIFL Securities — Analyst

That’s very helpful and extremely good. So how is the supply pipeline now panning out? Is there an ease in your supply chain? Or is that still a stretch? And will this advantage stay?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

On a comparative basis, it has eased out. But on a — but at the same time, we are very cautious. We are still maintaining high inventory levels so that we can deliver to the market what we promise. So it hasn’t come down to a level that wherein we can normalize our inventories to a very low level and just in time play can be made. Because there are certain components which — our current category of component wherein which requires a little bit of more handling still because those pressures haven’t gone away yet.

Puneet Gulati — HSBC — Analyst

Understood. That’s very, very useful. Secondly, in these orders which you announced, what should be considered as a base order and what could be large orders in this?

T. K. Sridhar — Chief Financial Officer

All are base orders, nothing is large order. So if you look into, as Sridhar explained, now 80% of our business is we can call it as a fast-moving industrial goods.

Puneet Gulati — HSBC — Analyst

Okay.

T. K. Sridhar — Chief Financial Officer

And then we have about 13% is coming for services, which is basically you can say as a service as delivered and as demanded by the customer. And then, of course, we have 7%, 8%, which goes in the category of projects. And projects have a long gestation period. So I would say much of the market is now for us is very fast conversion of our raw materials into cash category. So I think that’s all what we are seeing in our books.

Puneet Gulati — HSBC — Analyst

That’s very, very useful. Thank you so much. My last question is on the services part. While I think over the last two years, you’ve been talking about services becoming a significant part. But numbers perspective, it is still somewhere between 6% [Phonetic]. How should one read that?

T. K. Sridhar — Chief Financial Officer

No, I think, it’s not 6% to 8%. It’s slightly definitely higher side. That’s what it is.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Services, I think maybe you have taken us back because we can’t just dispute because you are an analyst. But we need to — our intention — our expectation is that the services are much higher in percentage than what you just mentioned. But we’ll have to verify and come back to you based on what you’re reading.

Puneet Gulati — HSBC — Analyst

No, no. Sorry. My bad. It is 12% to 13%. So that number sustains, right?

T. K. Sridhar — Chief Financial Officer

Yes, yes.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

That sounds like it, Puneet, because I don’t know — I didn’t know what you read because —

Puneet Gulati — HSBC — Analyst

Sorry sir, I misread the number.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

— we have provided information to you, right?

T. K. Sridhar — Chief Financial Officer

8% what you are mentioning is for projects.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Yes.

Puneet Gulati — HSBC — Analyst

Correct. Correct.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Yes. So services are 12% to 13%. But you can see since the uptake of the product business and our ETO business is very strong, so services in net value are expanding by 33%. So that’s quite a good expansion. But on a percentage basis, they will stay muted relative to the main business lines because they are expanding faster.

Puneet Gulati — HSBC — Analyst

Understood. That’s very helpful. Thank you so much and all the best.

T. K. Sridhar — Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.

Parikshit Kandpal — HDFC Securities — Analyst

Yeah, hi. Congratulations on a strong quarter, Sanjeev. So my first question is on this incremental demand or the large demand order inflows growth, so can you help us understand this with more granularity on brownfield versus greenfield orders? And also, if you can help us understand how is the traction in Tier 2 and Tier 3 cities, but that would also be definitely adding up to this growth.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

So I think let me bring even more granularity beyond me. So let me involve the President of our Divisions for Motion and Electrification, which are the largest businesses in us. So Sanjeev Arora is seated here, as well as Kiran Dutt. So Sanjeev, what do you think? What’s your view on what you are seeing in the market, which are the segments which are supporting us in our growth? Thank you for the question. And so I think it’s a very good question. Now the situation is that if you see, we are — when you talk of, say, heavy industry, we see greenfield as well as brownfield expansion. And large players are anyway playing into it. But when you talk of the — say, second line of players and the third line of players in those respective heavy industry segments, they are also expanding. So the crux is that in heavy industry, we see both the large projects from the greenfields as well as from the brownfield. Now even when we talk of the, say, the discrete part of the light industry. There also, we see good amount of expansions. And when we talk of that there is a well-supported mechanism from the government PLIs as well. So you will see the new investment and also you will see the brownfield investments. So overall, I would say this is the situation and we are confident that we will see much more of that in coming times. Thank you, Sanjeev. Kiran, how do you see on the electrification side?

Kiran Dutt — President, Electrification Business

Adding to what Sanjeev Arora has spoken about, what we see from electrification is that a few of the segments, since we are talking about Tier 2 and Tier 3, which I would also like to talk about there’s huge growth in terms of the buildings in Tier 2 and Tier 3 cities. So that is something which is really supporting us in terms of growth.

At the same time, when I look at overall as a perspective in terms of electrification, what I see is specifically in terms of infrastructure. I think both in — whether it is power infrastructure, maybe it could be renewable, it could be in terms of transport, I think there’s a huge growth what we are looking at. And that’s what is actually supporting us in terms of growth, whether it is metro, whether it’s Tier 2, Tier 3.

So all said and done it’s also very important to understand where exactly ABB is focused. ABB is also trying to focus in terms of Tier 2 and Tier 3 cities, more penetration there, and that’s also giving us a lot of results in terms of growth.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you, Kiran.

Parikshit Kandpal — HDFC Securities — Analyst

And sir, the last question is on this entire new energy theme, and so how do we tend to plug the product gap that’s running there, which we need to address because this is a high-growth segment. And we also said that we are looking for some acquisition given the strong cash balances, which we have. So how do you strategize and think about this high growth segment and how to address the product gap there?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Parikshit, can you mention again what segment you’re talking about?

Parikshit Kandpal — HDFC Securities — Analyst

So the entire energy theme, which is changing, the EV side, the entire green energy theme, which is going to take a big change. The decarbonization, basically. I’m talking about decarbonization piece. So the product gaps there and how do you intend to cap? Yeah.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Fair enough. So see, if you really look into ABB portfolio and you look into our theme, energy efficiency is core of our theme in terms of what we deliver to our customers. And a part of our 2030 GHG reduction target is that we will sell more products. If customers use more of our products, contribute to less GHG emissions. So that plays directly right at the heart of our core portfolio in the Motion and Electrification and Robotics as well as Process Automation proposition. So that’s something anyway is our core.

But when we see the EV play and the other areas, in India, the opportunity is very right for the simple reason, anything that we produce in this country, we use 30% more energy. So that means now the sensitivity of the large customers and medium-sized customers have come in that area. That’s why a lot of replacement market has come in wherein they are using, IE3 motors. There is even a demand for even higher efficiency motors. Because traditionally, ABB, India market has been IE2 through motors.

New buildings, which are coming up, new hotels which are coming up, they are demanding our building management systems so that they can reduce the energy footprint of their building. So all — about 70% of the buildings, which will exist in 2030, they are yet to be constructed. And building management system is one of the core element, which allows you to reduce 25% to 35% of your energy footprint.

So that again is another area where we see there’s a good uptake. Electric vehicles, all the new plants, whether it’s the scooters, or if you look into the car manufacturing, very deep use of robotics and automation is in play. And also, there’s a good demand for them to be able to use at the highest productivity level and the lowest energy cost level and minimum usage of the paint.

So those are the areas wherein the customers are discussing with us. So our whole portfolio is into play there. And as the industry demands more and they are demanding more, I think it is playing out in our order books and revenue books.

Operator

Thank you. I request you to come back in the queue for follow-up questions. We have a next question from the line of Deepak Krishnan from Macquarie. Please go ahead.

Deepak Krishnan — Macquarie — Analyst

Thanks for the opportunity and congratulations on a good set of numbers. I just wanted to understand, given that our cash balance is now INR4,000 crores, and you’ve indicated acquisitions, where are we at that stage, and how quickly or how soon can we see any action on the ground?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

What is the question?

Deepak Krishnan — Macquarie — Analyst

Acquisition — M&A.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

M&A. So we already have known our intention — made our intention known to the market that we are going for organic and inorganic expansions. We have a pipeline for the inorganic targets globally, which has local footprint. And also we have a list for the potential local parts. But these things take time. And we have to allow the current owners to come to a point that they are willing to deal with us. And as and when we are ready with that, I think we’ll talk to you.

Deepak Krishnan — Macquarie — Analyst

Sure, sir. Maybe just a follow-up essentially on the margin front. I think while we understand the benefits of a higher order backlog as well as a better capacity utilization, how do we overall see in terms of the competitiveness in terms of maintaining pricing? Do you see competitive intensity increasing given that everyone thought we could spin or do see you supply chain still being sort of an issue in that case?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

That’s a good question. So as I said, what we have seen is, apart from demand-supply situation, we have seen the migration of a large swath of customers from buying relatively cheap or relatively cheap quality products moving into the high quality product zone, which is a sweet spot for us. I think that’s one good movement we have away from the demand and supply situation.

So that’s something which we are very encouraged, because the customer is willing to pay a premium for better quality products, more energy-efficient product and something that they would like to make sure that their machines or their end user plants are effectively working. So that’s one movement we see. Now going forward, competitive intensity is different in different product lines. So we have 18 product lines, and we are exposed to 23 market segments. Competitive intensity keeps changing and varying in different segments based on how the competitors play in and also how they expand their footprint and their capabilities on the ground.

So I would say that always is never a one year issue or a one quarter issue. That’s a lifelong issue, one has to keep playing out. All what we can do is whatever benefits we are getting today, this is something we have been preparing for the last three, four years, and that’s what gives us the competitiveness as well as the capability to serve this market in current construct. And whatever we have done two years ago and now what we are doing, it will continue to pay us forward as we go forward. Yes.

Deepak Krishnan — Macquarie — Analyst

Maybe just on an overall mix, like you’ve indicated, Tier 3, Tier 4 cities are gaining share. How much contribution is essentially coming from there? And how easy is it for, say, an individual, say, SME to kind of choose an ABB product versus something that is already locally available there for a long time?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

So Tier 2, Tier 3, Tier 4 cities, this is where aspirational India sits at the moment. And they — and the good thing about aspirational India is they really are having access to any product that they want, given the logistics and the distribution system, which has been provided by the e-commerce players. And we also get the benefit of that bandwidth.

So we don’t see any letup by the Tier 2, Tier 3 OEM manufacturers to choosing sub-quality product because these products and these machines, which may be being produced in the Tier 2, Tier 3 cities because the cost of labor and the availability of labor is better, but these machines are going to the end users, which are the best-in-class or these are the end users which are operating and demand is very high for them.

So there is a consumption in the Tier 2, Tier 3 because the machinery builders, OEMs, they are supplying into the large cities. They could be supplying to Tier 2 or Tier 3 or Tier 1 cities as well. But when it comes to the consumption at the — in the real estate, wherein our electrification products and our Motion products also go, there again, we find there is a much higher aspiration to have the high quality and better brand products used in the homes and the offices because the offices which are being built, they are also being built to the good standard. And the architects and designers, they always make sure that the mix of the products that they use, they are more reliable and better quality mix as they design the offices.

So I think this is a multi-faceted change. It’s not only the choice of the person sitting in Tier 2, Tier 3, there are multiple forces play into it.

Operator

Thank you. Request you to come back in the queue for follow-up questions. [Operator Instructions] We have our next question from the line of Jonas Bhutta from Birla Mutual Fund. Please go ahead.

Jonas Bhutta — Birla Mutual Fund — Analyst

Good morning, gentlemen. And thank you for the opportunity and congratulations on a great set of numbers. One bookkeeping or an understanding question that I had was from our annual report. When we see this disclosure on foreign exchange used, that seems to have gone up materially in calendar year ’22 basis, the annual report that was just published a couple of days back. And it’s gone back two levels there.

Power Grid was part of our business. We would understand that there were a lot of imports coming in from the HVDC side. So what would have triggered this kind of import because I don’t see the commensurate increase in purchases from parent entities, which is part of your related party disclosures. So if you can just explain what led to this high level of imports, which are not from the parent?

T. K. Sridhar — Chief Financial Officer

Very good. I think there was a similar query too on the same topic. But I think the expenditure in foreign currency for 2022 was INR4,460 crores vis-a-vis INR3,060 crores, which happened in 2021. So it basically has two broad categories of items. One is the value of imports, what we do. So it has gone up by INR1,220 crores from INR3,000. It was INR3,420 crores in 2022. And in ’21, it was INR2,200 crores. So we definitely had INR1,200 crores of imports, which happened.

So and that’s basically triggered by the revenues, which we have in the backlog for which we import material. And that also are more from an alternate supply vendor, which we have created, not much from the ABB Group, it is more from the third-party imports what we had. So that I think this is well established that whenever we have an order backlog to execute, and we know where the inventories to procure from keeping the interest of delivery to the customers, we take the right decisions and they are pretty much very well validated.

So then the other thing is basically on the other expenses like the group fees, the traveling for service revenues as well as the market pursuits and export allocations, what will happen, as well as the IS [Phonetic] cost saw an increase of approximately 10%, 11% over the base of 2021 of roughly INR900 crores. So I think overall, this was basically the explanation. I think, Jonas, would help you understand why there is a change in the expenditure in foreign currency.

Jonas Bhutta — Birla Mutual Fund — Analyst

Sure. And just wanted to squeeze in one more. On the process automation bit, while we’ve seen a sequential decline in order flows and you’ve highlighted the pipeline is still strong, if you can elaborate on the key sectors that are showing strength in PA particularly? And what is the direct, indirect exposure to government projects in this segment? That’s my final question. Thanks.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

So in fact, we have three types of businesses in PA. One is PA Energy, and then PA Process Industry and PA Measurement and Analytics. In the PA Energy, we have the exposure to the chemical, petrochemical, pharmaceutical, and they are mostly the private industries. But at the same time, we — increasingly, what used to be in the government hands, I think that is again like city gas distribution. That’s another area which is expanding quite widely. So that’s another segment.

And of course, the SCADA system for ONGC, public sector units, business with Indian Oil, business with Oil India, those are kind of the categories that we have. And also we have business with NTPC.

So that’s something what we see in the PAN book. In PAPI, it’s purely a play or the process industry is purely a play in the mining, cement, aluminum, metals, and large process industries. And then that largely is a play in private sector, most of the time. But there can be one PSU or the other, which also buys our products and services. And as far as the measurement and analytics are concerned, it’s a pure product or the engineered to order play.

Jonas Bhutta — Birla Mutual Fund — Analyst

Got it. Thank you and all the very best.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you.

Operator

Thank you. We have the next question from the line of Mahesh Bendre from LIC Mutual Fund. Please go ahead.

Mahesh Bendre — LIC Mutual Fund — Analyst

Hi, sir. Thank you for taking my question. Sir, in the presentation, you have mentioned that the theme for the quarter is electronics. And the market is expected to grow 30% CAGR over the next three years. So in that our offering is basically switchgears and automation switches and all that. So is it fair to assume that the electrical part of our business will grow along with market. If the growth in user industries is expected to grow 30%, our business segments, should we also grow at least in that rate?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Well, I think you have a good question, and it’s a good correlation, because typically the businesses like Motion and electrification, they are directly correlated to how the growth in the economy and the right segments which are going on. But I have Kiran here. Kiran, what would be your qualified view on it?

Kiran Dutt — President, Electrification Business

I think this is a very, very good question. In fact, a very exciting question for me as well. Looking at the way electronics has been growing in India and manufacturing of cell phone specifically, I think it’s a very important segment for us on the way forward. It could be called as an emerging segment for us in terms of our approach.

So what we see, as you said, yes, there could be a very good growth. But at the same time, it’s also a lot of things are on paper, but it has to materialize over a period of time. So we are looking forward very much in terms of the investments coming from various manufacturers who are ready to, of course, put in money. But there is a subsequent period which is required for the gestation of the project and that played forward. So we are waiting for it as eagerly as you are. Let’s hope for the best going forward how it happens.

We are ready with all the products which are required for this particular segment and the offering is perfect for it, and we hope to do the best in the — maybe in the quarters to come.

Mahesh Bendre — LIC Mutual Fund — Analyst

Thank you, Kiran.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you.

Operator

Thank you. We request you to come back in the queue for follow up questions. We have the next question from the line of Aditya Mongia from Kotak Securities. Please go ahead.

Aditya Mongia — Kotak Securities — Analyst

Good afternoon, everyone and thanks for the opportunity. My question is really a straightforward one. What is the capacity utilization across your four segments at this point of time? And if you can kind of split it across your existing plants and the new capacity that you’ve added, even better.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

So capacity utilization, we have 25 manufacturing plants. So of course, we are using capacities in different ways. So some plants, we are still using single shift. But on that rate, the utilization could be as high as 85%, 90%. But we still have room to increase more shifts. Certain plants are working with two shifts, and we have a capacity possibility to expand by using the third shift. So that’s how the scenario. It’s quite distributed. And also you should know that over a period of time, we have increased a lot of automation and robotics in our manufacturing in some of our plants. And there, again, increasing the shifts and throughput of those plants is much more flexible and easy for us.

Aditya Mongia — Kotak Securities — Analyst

Got that. Thank you. That’s my only question. Thank you.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you.

Aditya Mongia — Kotak Securities — Analyst

Thank you. We have our next question from the line of Priyankar Biswas from Nomura. Please go ahead.

Priyankar Biswas — Nomura — Analyst

Thank you, sir for taking my question. So in your chart, you have highlighted as the high-growth areas, the focus areas. So can you give me some color like what percentage or something like that of your order backlog these focus areas are? And if you can throw some further light, like what is like the market shares you have in this area?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Biswas, I would have loved to give you this particular answer, right? So but actually endangers my existence in the competitive scenario. So therefore, we don’t share the sensitive information. So if you have any other questions, more than happy to answer that.

Priyankar Biswas — Nomura — Analyst

Sir, further is like we have recently seen like, let’s say, commodity prices soften quite a bit. So should we — so is there something like that in the newer orders you may have to pass through some of it? And is it happened that way? Or should we be able to retain the complete pricing hike that we have taken, let’s say, over the past couple of quarters?

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

The market pricing, inflation and the supply-demand situation, these are the things which take care of the pricing in the market. We are not the ones who will decide what price should be kept, and that’s because there’s a fair competition in the market, and that’s something which describes what the price point customers are willing to pay.

Priyankar Biswas — Nomura — Analyst

Okay, sir. That’s all from my side.

Sanjeev Sharma — Chief Executive Officer, Country Head & Managing Director, South Asia

Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraints, that would be our last question for today. I now hand the conference back to Mr. T. K. Sridhar for closing remarks. Thank you, and over to you, sir.

T. K. Sridhar — Chief Financial Officer

Thank you very much, and thank you for joining this particular call and interesting questions, which was posed to the management overall here. And also it was a pleasure answering to those particular questions. But also, we should understand and also appreciate that we also learn in this perspective as to how the business is being reviewed by the various stakeholders of the organization, because why I say this yesterday, we had — day before yesterday, we had the Board meeting for Q1 ’23. Then yesterday, we had the AGM where we had the questions from shareholders and the other investors. And today, we have the analysts looking into the organization.

And thank you for this active participation. I look forward for the next call after the next quarter. Thank you very much and to the management team, which would make it happen.

Operator

[Operator Closing Remarks]